Arnold Kling  

The Case for Competitive Government

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Tim Harford writes,


What is missing is the political demand for tests of what really works. Too many policies on education, welfare and criminal justice are just so much homeopathy: cute-sounding stories about what works leaning more on faith than on evidence. Politicians and civil servants, faced with some fancy new idea, should get into the habit of asking for a proper randomised trial. And we, as citizens, should be equally demanding.

In fact, the political system is very ill-suited to trial and error learning. That is what markets are for. That is why I favor competitive government.

Thanks to Mark Thoma for the pointer.


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CATEGORIES: Political Economy



COMMENTS (8 to date)
david writes:

I feel obliged to remind readers that competitive governments have no obligation to compete as competitive firms do (and therefore race to the laissez-faire bottom); even in the absence of military takeover there are still ways for a given small state to stay head through coercion.

e.g. - take two adjacent 'small open economy' states, say Libertopia and Singatopia. Libertopia practices laissez-faire, with free immigration and emigration and trade. Singatopia subsidizes investment by taxing consumption and coerced savings (i.e., sacrificing current welfare to subsidize future growth, via Solow).

Emigration is prevented either by outright coercion or assorted incentives - e.g., subsidizing homeownership to discourage mobility, or state-level loyalty propaganda. Outward capital mobility is restricted so that only Singatopia, not Libertopia, benefits from the cheap investment - e.g., by handing the coerced savings to a state bank which does not lend out by mandate, or by straightforwardly subsidizing local investments, and so on.

Singatopia maintains this discipline by its ruling elite simply seizing small amounts of surplus, a la any rational stationary bandit.

Sit back and watch whilst Singatopia sprints ahead. Note that many US county and state governments can and do already perform parts of this, like backing business investment (as David Henderson learned recently). The Constitution might prohibit California from preventing Californian emigration, but it doesn't prevent California from subsidizing things that tie Californians to their geography in other ways. And, unsurprisingly, county and state governments do subsidize investment. Those that did not do so simply shed people in the long run.

Note that this model hasn't invoked market failure anywhere to suggest faster coercive state growth. It's pure Solow; the coercion is there only to force savings and halt capital mobility. The Soviet Union used to be theorized to be practicing this, but of course it was not subject to government competition and dedicated its cheap investment towards nonuseful goals. But there's nothing stopping a competitive government from simply subsidizing existing market-disciplined investment.

(cue Austrian gasps of horror. But I think I'll go with the consensus and have my aggregated K, thanks. Austrians are still very much heterodox and likely becoming even more so)

Doc Merlin writes:

"Singatopia maintains this discipline by its ruling elite simply seizing small amounts of surplus, a la any rational stationary bandit"

All states are stationary bandits. "Good" states seize small amounts of surplus. "Bad" states seize or try to control large amounts of surplus.

"The Soviet Union used to be theorized to be practicing this, but of course it was not subject to government competition and dedicated its cheap investment towards nonuseful goals. But there's nothing stopping a competitive government from simply subsidizing existing market-disciplined investment."

Political forces determine how this is spent instead of market forces. This means that its almost always spent inefficiently. However, with state competition, at least there is an obvious market response due to outmigration of businesses and labor.

Doc Merlin writes:

Forgot to add: If they chose not to compete, the states lose the market feedback (by refusing to compete with other states) then they will end up spending their money in non-useful ways. This is what happened to the soviet union, North Korea, etc.

Lord writes:

I really don't see a lack of demand for this at all, but complete and utter uncertainty about what appropriate measures might be and how they can avoid being gamed, together with a lack of memory over what was abandoned and why. Markets succeed because they don't have to deal with this, until they fail because their incentives were faulty in the first place.

david writes:

Doc Merlin, are you familiar with the stationary bandit model? I think you are interpreting my choice of phrase as a fanciful jab at states but I was referring to Mancur Olson's model where stationary bandits have longer time horizons and therefore steal less in the short run. Saying "all states are stationary bandits" rather misses the point; it's a metaphor.

However, with state competition, at least there is an obvious market response due to outmigration of businesses and labor.

Except that a state can coercively prevent or discourage businesses and labor from leaving, and therein lies the rub. I already described how and why a state might do this.

Under state competition, it's quite possible that states that coerce in some manner outcompete states that don't. Libertarianism may not be the equilibrium outcome, and one can construct a case for a nonlibertarian outcome using solely Chicago elements, which is not encouraging. We don't even have to invoke market failure.

We are well beyond the point of comparing Libertopia with Soviet Russia or North Korea, which surely sets yourself too low a bar to cross. There are many points between laissez-faire and a command economy.

mulp writes:

US firms compete with firms in other nations and the thing other than the natural resources in the land the firm has available to it is labor. A major part of labor cost one way or another is health care cost. It can be a burden indirectly by including the cost in the wage, as a benefit, or as a tax, or some combination, but one way or another health care costs are an economic burden on firms which are incorporated into export prices.

Selected nations:
Healthcare costs as a percent of GDP
Australia 8.7%
Canada 10.1%
France 11.0%
Germany 10.4%
Japan 8.1%
Norway 9.0%
Sweden 9.1%
UK 8.4%
USA 16.0%
2007 OECD data

US firms end up with 16% of its costs attributed to health care costs compared to the other firms they compete with in the international market.

I assume the US firm is competing with developed nations which all have universal health care, and not nations where workers who are injured or disabled on the job or from the environment from pollution or disease are simply cast away to die, and where the US will never compete.

Health reform is a competitive priority and the evidence all points to some form of universal health care, as few nation's health care systems are the same, with universal coverage being the single factor common to all.

Doc Merlin writes:

'Except that a state can coercively prevent or discourage businesses and labor from leaving, and therein lies the rub. I already described how and why a state might do this.'

You completely missed my point, which was that states that restrict outmigration end up missing the signals that outmigration normally provides. This means they don't get signals on how to spend their money wisely, and end up spending it extremely poorly.

States that don't restrict outmigration, receive the signal migration provides to tell them how to spend money properly, and thus spend it better.

'We are well beyond the point of comparing Libertopia with Soviet Russia or North Korea, which surely sets yourself too low a bar to cross. There are many points between laissez-faire and a command economy.'

I wasn't comparing the Soviets and NK versus "libertopia." I was using them as examples of states that coercively make it very hard to leave. Very few states actually use coercion to restrict outmigration. And the only modern examples I could think of that did were communist countries (which naturally had very bad spending allocation).

Doc Merlin writes:

Thought of another example, the fascist and national socialist countries also restricted outmigration.

Oh and I am familiar with the stationary bandit model, my point was that not all "stationary bandits" *actually* act in ways that optimize their long term interests. Quite a few states in the past have milked their populace dry (certain small dictatorships come to mind).

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